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Malaysia set to re-enter index as controls lifted

Malaysia will be re-entering MSCI indices at the end of May after 19 months in exile. Many actively-...

Malaysia will be re-entering MSCI indices at the end of May after 19 months in exile.

Many actively-managed portfolios maintained their exposure to the Malaysia but will consider taking profits when the country re-enters the indices because political risk is on the increase.

Malaysia is expected to constitute around 10% of the widely followed MSCI AC Far East Free ex Japan Index. In October 1998 MSCI excluded the country from its indices following the government imposition of capital controls the previous month. The controls restricted the amount of money foreign investors could take out of the domestic market.

Edinburgh Fund Managers will be underweight Malaysia when the index changes are made. Currently Edinburgh Pacific unit trust has around 5% exposure to the country. This weighting was as high as 8% but throughout this year Alistair Thompson, manager of Pacific, has been taking profits. He says: "With the country re-entering the index there is a huge demand for shares from foreign investors."

Thompson's view on Malaysia recently deteriorated as political risk increased following the prime minister's recent sacking of the country's finance minister. Thompson is also worried by the economic fundamentals of many companies. "There is also scant evidence of corporate restructuring and many of the companies are in debt," he adds.

On the upside the economy continues to recover and consumer spending should rise. An increase in consumer demand will benefit Tan Jong, a gaming company which provides lottery tickets, according to Thompson. The Pacific fund holds a stake in the company. The portfolio also has exposure to Malay Bank, although Thompson has halved the portfolio weighting in the stock as it is now trading at over three times price-to-book. He says: "The stock is overvalued and I expect a correction but over the longer term it is the best-managed bank in Malaysia."

Investec Guinness Flight has a 3% weighting in the country. Robert Conlon, chief investment officer for Asia at Investec, says the economy grew at a 10.6% year-on-year rate during the fourth quarter of 1999, led by 25.2% growth in manufacturing output. This was largely thanks to the large multinational electronics industry in Penang, according to Conlon.

"Malaysian exports have been growing rapidly. Confidence has improved and domestic demand is showing signs of recovering. Hence asset prices have stabilised. This is very good news for banking." Conlon has not yet decided what adjustments to make in his exposure to Malaysia. However, he believes the country is very competitive at the current pegged exchange rate.

Friends Ivory & Sime will be underweight the country after the index changes. Jim Anderson, manager of Pacific Assets investment trust, says the economy has done fantastically well but believes there are more exciting opportunities elsewhere.

He says: "On an opportunity costs basis Hong Kong and South Korea look more attractive. South Korea is due to see an upturn in performance after lagging over the past year."